Exactly what these red barrels contain is not clear, but as the object's DromEd name is "Powderkeg", it may be assumed that it is black powder. The insignia on the side is the elemental symbol of Fire.
They do not seem to be produced for arms purposes, and there is little evidence to suggest them being used conventionally as weapons. However, they are environmental risks, and make very effective trap enhancers. They are found in both TDP/TG and T2. They detonate by being in the proximity of fire or explosions, such as Explosive Mines, Flares or Fire Arrows, and cause massive damage.
Exploding barrels exist in TDS and carry out the same function. In addition, these regenerate in the same places about the city streets (including at least two in Stonemarket Plaza). They can also be picked up, greatly reducing effort when positioning them. These barrels however are often unmarked and identical to their harmless counterparts. Their positions should be noted before devising anything elaborate.
A Powderkeg in TDS
In certain missions, such as St. Edgar's Eve, Killing Time, and Of Brethren... And Betrayers, small barrels can be found with the flame label on three sides. Those in the Clocktower and the Keeper Compound are empty, however.